PARIS (S&P Global Ratings) May 18, 2018--S&P Global Ratings today affirmed its 'A-' issue credit rating on the senior secured debt issued by Abu Dhabi-based Ruwais Power Co. PJSC (Shuweihat 2) ("S2" or "ProjectCo"), a private joint stock company incorporated under the laws of the United Arab Emirates and the Emirate of Abu Dhabi. The outlook on the rating remains stable. The debt comprises US$825 million senior secured bonds due August 2036, issued by S2 in 2013 primarily to refinance existing debt at a lower cost and to return money to shareholders. S2 manages the development, ownership, insurance, and operation and maintenance (O&M) of the brownfield power-generation and sea-water-desalination tolling-plant at the Shuweihat complex in the Emirate of Abu Dhabi, which operates under an availability-based, 25-year power and water purchase agreement (PWPA) with Abu Dhabi Water and Electricity Company (ADWEC). The PWPA passes the majority of the project's operating costs and risks through to ADWEC, which is ultimately a wholly owned government entity. The plant entered operations in October 2011.

The rating affirmation reflects continued solid operational performance in 2017 and the first quarter of 2018, with power and water availability above both contractual threshold requirements and budget expectations. Under the availability-based PWPA S2's availability performance underpins the project's cash flows, given that the majority of the project's operating costs and risks are passed through to ADWEC. In addition, the plant's fuel usage efficiency (heat rate performance), which also affects cash flows, was consistently higher than budget by 1.8% on average, generating a small bonus payment of US$241,000 to S2 in 2017.

As a result of the plant's performance track record, we have revised our base-case availability assumption to 94% for power, up from the previously assumed 92%, and continue to assume 94% for water, to reflect our expectation of solid operational performance going forward. The O&M service provider, S2 Operations and Maintenance Company W.L.L (S2 O&M), has demonstrated a good level of expertise in maintaining the plant, which underpins the performance and supports a higher preliminary stand-alone credit profile (SACP) of 'bbb-', up from 'bb+' at the last review. The availability assumptions are more in line with those adopted for the peer project, Emirates Sembcorp Water & Power Company. The minimum annual debt service coverage ratio profile (ADSCR) under our base case has strengthened to 1.20x minimum and 1.22x average, a marginal increase from 1.19x minimum and 1.21x average at our last review. Our overall assessment of the operations phase SACP is unchanged at 'bbb' and reflects a one-notch positive rating adjustment for the project's resilience under our downside scenario.

We consider S2 to be a government-related entity (GRE) as, in our opinion, the project could be affected by extraordinary intervention from the government, based on the government's past actions. In accordance with our criteria for GREs, we assess the likelihood of timely and sufficient extraordinary government support to S2 if faced with financial distress as moderately high, based on our view of the project's important role for, and strong link to, the government. The S2 plant is integral for meeting Abu Dhabi's power and water demand, representing approximately 12% of the net installed power and water capacity of independent power and/or water plants in the Emirate. The 'A-' issue credit rating therefore reflects two notches of uplift from the project SACP.

In the operational period from October 2016 to September 2017, availability of power was 91.1% in winter (October to March) and 99.7% in summer (April to September), resulting in an average availability for the year of 95.4%, above the 94.6% budget expectations. For water, availability over the same period was 88.7% in winter and 99.5% in summer, resulting in an average availability for the year of 94.1%, above the 93.1% budget expectations. Overall availability performance is driven by the amount of scheduled maintenance and unscheduled outages, which were less than budget expectations for both power and water over the year. Scheduled power outages amounted to 382,000 megawatts (MW), lower than the budget expectations of 432,000 MW, and unscheduled outages amounted to 54 MW, versus 208 MW forecast. For water, scheduled outages amounted to a loss of 1,775 million gallons (MIG) against 1,400 MIG forecast, while unscheduled outages amounted to 217 MIG versus 814 MIG forecast. As is typical for a plant of this nature in the Middle East, S2 carries out its scheduled maintenance in the winter when power demand is at its lowest.

Scheduled and unscheduled maintenance of the plant is the responsibility of S2 O&M, a joint venture company owned by Engie (50%), Osaka Gas (25%), and Marubeni (25%) (all of which are also shareholders in the project). The 25-year O&M agreement matches the term of the PWPA operating mechanism and is fixed price through to Oct. 18, 2023, with an anticipated switch to a cost-plus-fee mechanism thereafter. We believe that the project has the experience to manage operating costs following expiry of the fixed-price term. Therefore our base case does not assume any operating cost increase after the contract expiry.

S2 O&M subcontracts the routine and heavy maintenance of the gas turbines to Siemens AG and Siemens LLC, the original equipment manufacturer, under a fixed price, long-term maintenance contract (LTMC), which is due to expire in the winter of 2019/2020. Expiry of the LTMC is linked to the number of operating hours of the gas turbines. S2 expects to finalize the terms and counterparty of a replacement LTMC during the summer of 2018, to start in January 2020. Our rating assumes a smooth transition to the new LTMC service provider, be it Siemens or another player in the market. We do not factor in any potential upside from the renewal of the LTMC.

The stable outlook reflects our view that S2's operating performance will continue in line with our base-case expectations, with average and minimum DSCRs at around 1.20x over the life of the project. In addition, we anticipate that the project will continue to have a moderately high likelihood of support from the government at least over the medium term. The stable outlook also reflects our stable outlook on Abu Dhabi.

A lowering of our rating on Abu Dhabi or a one-notch downward revision of our project SACP would result in a lowering of the project rating by at least one-notch under our GRE criteria.

We could lower the project SACP in the event of high forced outage events, or significant cost increases that cannot be passed down to the O&M service provider, that drive the minimum DSCR down toward 1.15x. The ratings could also come under pressure if performance of the project under our downside scenario was to weaken to such an extent that ratios fall below 1.10x over a sustained period and cannot be adequately supported by dedicated liquidity reserves, such as undrawn amounts under the working capital facility.

Additionally, the project SACP would be constrained if the creditworthiness of any of the financial counterparties (currency and interest-rate swap providers, or debt service reserve letter of credit provider) were to fall below 'bbb'.

Due to the availability-based payment mechanism under the PWPA, there is limited scope for a higher rating at this stage. The minimum ADSCR under our base case would need to trend toward 1.30x to drive a higher project SACP. Under our GRE criteria, an upgrade of Abu Dhabi would not lead to a higher issue credit rating on the project's debt.